There is an interesting phenomenon happening in the self-funded industry today. Because medical costs are so exorbitant and arbitrary, many health plans have elected to use “carve-outs,” which are provisions in a plan document or an amendment which specify that a given service – for this example, dialysis – will be paid at a rate different from the rest of the plan’s benefits. In the case of the now-popular dialysis carve-out, dialysis claims are paid at what is generally a percentage of Medicare rates, typically somewhere in the range of 120% to 180% of Medicare. Patients who are Medicare-eligible by virtue of end-stage renal disease (ESRD) have certain protections from balance-billing by providers who accept Medicare payments, so plans sometimes view dialysis carve-outs as a no-brainer.

In theory, a dialysis carve-out is a virtually flawless solution to large dialysis claims exposure. The plan can reprice claims based on its clear plan language, pay only a fraction of billed charges, and best of all, the provider can’t even balance-bill the member in many situations.

Lest we forget, however, the factor that will cause substantial problems in so many situations, including this one: PPO networks. Here’s a story.

It’s a beautiful day; bright, sunny, unseasonably warm – the first signs of spring after a long and cold winter. A health plan client of ours incurs over a million dollars in dialysis claims for two patients. The plan document contains language such that the plan tenders payment for all dialysis services at 160% of Medicare. The plan’s claims administrator processes claims at that amount, resulting in savings of some $800,000 to the plan from billed charges. A bird chirps blissfully somewhere in the distance.

A couple of weeks pass. The dialysis provider receives the plan’s check. The accounts receivable department talks about the amount of the check, checks the network rate, and says “no, this will not do.” (The sky fades to a stormy grey; the temperature drops and it begins to snow.) The plan has an agreement with the network whereby the provider is guaranteed to receive 92% of billed charges. The provider has not agreed to accept less reimbursement than what the contract requires – yet the plan document allows payment at 160% of Medicare.

Well, now we’re in a pickle. It’s a back-and-forth between the plan (“our plan language says all dialysis providers are paid at 160% of Medicare!”) and the dialysis provider (“we have a contract; honor it or face a lawsuit!”). Are the provider’s charges objectively reasonable? No. But does that give the plan the right to ignore its network contract? That’s another no.

After many unsuccessful conversations, this case, like the payor’s stomach, remains unsettled. The plan’s choices are to pay the full balance, negotiate a settlement, or face a lawsuit. The primary lesson to be learned from this case is to make sure the plan document and network contract do not contradict one another. If the plan document requires one amount of payment but the network contract requires another, that’s a problem. This is one major reason that so many plans are choosing to shy away from their primary or wrap PPO networks and embrace reference-based pricing solutions…but that’s another story, for another day.